Depressed tanker spot rates could lead to increased scrapping

In its Marine Transportation: Tankers e-newsletter for August 30, Dahlman Rose & Co. reports that weak day rates in the tanker market for older tonnage could lead to increased scrapping.

Dahlman Rose says that spot rates for Very Large Crude Carriers have averaged about $18,000/day in 2011 and are now under $10,000/day. That's well below the 2003-2008 average of $67,000/day and markedly below rates during previous downturns in 2002 (average rate of $23,000/day), and 1999 (average rate of $19,500/day).

The 2000-built VLCC Tenzan recently sold for $36 million, which has increased industry concerns, says Dahlman Rose. The 281,050 dwt, 330m x 60m crude oil tanker has a double hull, with 15 cargo tanks. Its next drydock is scheduled for March 2013. The registered owner in the Equasis database was Japan's Blossom Maritime SA.

From the beginning of this year, Clarkson has reduced its assessments for 10-yr-old VLCCs by 33% to $40 million. By contrast, five-year-old VLCCs are currently assessed at $76 million.

Dahlman Rose says scrap prices are over $500/ton, implying a VLCC scrap value of $19 million. Double-hull VLCCs built prior to 1996 are worth at best $20-$25 million in this market, meaning their scrap values represent 75-95% of their trading value—the highest percentage since the early 1980s.

With charteres showing a preference for VLCCs 15 years-old or less, shipowners might be tempted to scrap older VLCCs at current scrapping prices and depressed spot market conditions. There are currenly 60 VLCCs of 16-years-old or or above.

This year, 15 VLCCs have been removed from the fleet, compared to 43 VLCCs in 2010.

With the current fleet of 570 VLCCs oversupplied by 30-50 vessels, "scrapping of legacy tonnage should help bring the market closer to equilibrium and above cash operating costs for an extended period," says Dahlman Rose.

"From a demand perspective, however, we believe continued heavy newbuilding deliveries will weigh on the overall market and therefore do not expect a material shift in fundamentals until 2013."